csht Answer

Running head: CASHFLOW 1

CASHFLOW 4

Statement of cash flow

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Statement of cash flow

The reporting purpose of the statement of cash flow is to show the changes in the statement of financial position and the profit and loss account effects on the cash and the cash equivalents. The cash flow breaks down events into financing, investing activities, operating activities, etc. Investors are interested in the cash flow for various reasons, including determining the firm's ability to adequately pay for its processes. The cash flow indicates the liquidity state of the firm and solvency of a company ("statement of cash flows | Boundless accounting," n.d). It is useful to the creditors and investors in comparison to the operating and performance efficiency of different firms. Cash flow offers investors with critical information regarding the timing, and the probabilities of the future cash flows form an organization.

Cash flow has three types of activities which are financing investing and operating. The financing activities refer to capital provision activities, including the cash chipped in by the banks in the form of loans, and form the shareholders ("statement of cash flows | Boundless accounting," n.d. It also represents cash outflow in the way of repaying the loans and dividends paid out to the owners of capital. Operating activities alludes to the repetitive tasks in the firm such as sales, production, transporting goods, wages and salaries, etc. operating activities such as sales generate cash, which is an inflow into the firm. In contrast, expenses such as the purchase of raw materials will lead to cash outflows from the firm to the suppliers.

Depreciation is a non-cash expense and is, therefore, is not taken as part of the cash outflow. Since depreciation reduces the firm's net profits, the amount of depreciation is added to the firms' operating activities in the statement of cash flow ("How does depreciation affect cash flow?" 2016). Therefore depreciation is not a source of cash since it does not generate some money for the business from external sources but is a non-cash expense.

References

How does depreciation affect cash flow? (2016, August 2). Investopedia. https://www.investopedia.com/ask/answers/080216/how-does-depreciation-affect-cash-flow.asp

The statement of cash flows | Boundless accounting. (n.d.). Lumen Learning – Simple Book Production. https://courses.lumenlearning.com/boundless-accounting/chapter/the-statement-of-cash-flows/